Exchange Rate Correlations Research Articles

Exploring the Spillover effects of tail risk fluctuations in the RMB exchange rate—The time-frequency and quantile connectivity perspective

This study constructs spillover indices from a volatility spillover network perspective using the Quantile Vector Autoregression (QVAR) model, capturing the RMB exchange rate's tail risk and time-frequency effects across varying shock sizes. Empirical results show that the QVAR-based spillover index more effectively captures the tail risk spillover effects across different quantiles. In the time domain, spillovers between RMB exchange rates are dynamic and particularly sensitive to extreme contingencies. In the frequency domain, RMB exchange rates demonstrate significant spillovers, primarily at low frequencies. During extreme upward events, dynamic observations show high-frequency spillovers surpassing low-frequency ones as dominant drivers in the tail spillovers of the RMB exchange rate. Additionally, the analysis of tail dependence indicators indicates a strong asymmetry in RMB exchange rate correlations, emphasizing market participants' heightened sensitivity to unfavorable shocks. These findings can serve as a reference for policymakers to strengthen risk management of the RMB exchange rate.

Factors That Influence Stock Prices In The Financial Sector On The Indonesian Stock Exchange

An important element that investors pay attention to before investing is observing the company's stock price. Banking is an industry that plays an important role in contributing to the Indonesian economy. The aim is to determine the correlation of liquidity, solvency, firm size, exchange rates, credit risk and capital with stock prices in banking partially and simultaneously. The independent factors in this research are liquidity which is proxied by the current ratio, solvency is using DER, company size is using the natural logarithm of total assets, the exchange rate is proxied by the middle rate, credit risk is proxied by NPL and capital is proxied by CAR. The dependent factor in this research is the stock price. Research samples were obtained from financial reports listed on the Indonesia Stock Exchange. This research uses quantitative methods, the analysis technique used is descriptive statistics, while the research hypothesis is tested using multiple linear regression analysis with statistical tools. The determination of the sample was carried out using a purposive sampling method in banking. The results of this research show that simultaneously liquidity, solvency, company size, credit risk, exchange rates, and capital can influence bank stock prices. Partially, stock prices are positively correlated with firm size. However, stock prices are still negatively correlated with credit risk as a proxy for NPL. While stock prices have no correlation with liquidity, solvency, exchange rate and capital.

Why Fixed Costs Matter for Proof-of-Work–Based Cryptocurrencies

We assess how the cost structure of cryptocurrency mining affects the response of miners to exchange rate fluctuations and the immutability of cryptocurrency ledgers that rely on proof-of-work. We show that the amount of mining power supplied to currencies that rely on specialized hardware, such as Bitcoin, responds less to adverse exchange rate shocks than other currencies respond to such shocks, a fact that is instrumental to avoiding double-spending attacks. The results may change if mining equipment used for one cryptocurrency can be transferred to another. For smaller currencies with low exchange rate correlation, transferability eliminates the protection that fixed costs provide. Our results weaken doomsday predictions for Bitcoin and other cryptocurrencies with declining block rewards. This paper was accepted by Bruno Biais, Special Section of Management Science: Blockchains and Crypto Economics. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4901 .

Retracted: Analysis and Prediction of Corporate Finance and Exchange Rate Correlation Based on Machine Learning Algorithms.

[This retracts the article DOI: 10.1155/2022/2850604.].

Origins of international factor structures

We show that exchange rate correlations tend to be explained by the global trade network while consumption correlations tend to be explained by productivity correlations. Sharing common trade linkages with other countries increases exchange rate correlations beyond bilateral linkages. We explain these findings using a model of the global trade network with market segmentation. Interdependent global production generates international comovements, while market segmentation disconnects the drivers of exchange rate correlations from the drivers of consumption correlations. Moreover, we show that the trade network generates common factors found in exchange rates. Our findings offer a trade-based account of the origins of international comovements and shed light on important frictions in international markets.

Analysis and Prediction of Corporate Finance and Exchange Rate Correlation Based on Machine Learning Algorithms.

Based on the risk management of exposure to foreign exchange assets and liabilities and the application of financial derivatives, this paper provides an in-depth analysis of the financial and exchange rate risks of foreign-funded enterprises. Therefore, a method of evaluating the financial performance of listed financial enterprises based on principal component analysis and neural network model is proposed. First, principal components of alternative financial performance input-output indicators are extracted using principal component analysis. Subsequently, these principal components are used as input-output data for the DEA model to derive the relative validity evaluation results of the financial performance of individual financial enterprises and to provide a reference for decision making to improve the financial performance level of financial enterprises. Combined with the economic business data of the enterprises, an empirical test on exchange rate risk management is conducted and relevant suggestions are made on how foreign enterprises can reduce exchange rate risk losses. It has important theoretical value and practical significance for enterprise finance and exchange rate management.

Equity home bias and consumption-real exchange rate puzzles: A joint solution

In a standard dynamic stochastic general equilibrium model with a complete asset market, home agents should hold a foreign equity biased portfolio to hedge the non-traded labor income risk, which contradicts home equity biased portfolios observed worldwide. As the labor income share increases, the degree of home bias should decrease because there is more incentive to hold foreign equity. In the data, there is not any evidence that the labor income share and the degree of home bias are negatively correlated. The standard model also predicts that the consumption differential-real exchange rate correlation is positive, while it is negative in the data. I show that a combination of market incompleteness, non-tradable goods, and labor supply can explain the three features above. My model can generate a large equity home bias, despite the strong positive correlation of non-traded human capital return with domestic equity return. The home bias is not sensitive to the labor income share. The consumption differential-real exchange rate unconditional correlation generated by my model simulation is zero.

Why Fixed Costs Matter for Proof-of-Work Based Cryptocurrencies

We assess how the cost structure of cryptocurrency mining affects the response of miners to exchange rate fluctuations and the immutability of cryptocurrency ledgers that rely on proof-of-work. We show that the amount of mining power supplied to currencies that rely on specialized hardware, such as Bitcoin, responds less to adverse exchange rate shocks than other currencies respond to such shocks, a fact that is instrumental to avoiding double-spending attacks. The results may change if mining equipment used for one cryptocurrency can be transferred to another. For smaller currencies with low exchange rate correlation, transferability eliminates the protection that fixed costs provide. Our results weaken doomsday predictions for Bitcoin and other cryptocurrencies with declining block rewards.

Foreign Investments in the Chinese Bond Markets

The Chinese bond market is the second largest in the world. However, studies on Chinese bond markets are very few, and especially there are no studies on foreign investments in the Chinese bond markets. This study fills the gap in the academic literature by focusing on foreign investments in the Chinese bond markets. By using the least-squares model with breaks, this study finds that although, in theory, the factors of exchange rate, yield spread, and yield correlation should play a significant role in attracting foreign investors to invest in the Chinese bond markets, the specific effects depend on the stage of the Chinese bond markets’ open-up. Initially, the main foreign investors are central banks and similar institutions, and they primarily consider more strategic factors than pure return or risk factors. As more institutional investors have entered the Chinese bond markets, the considerations of enhancing risks and/or reducing risks become more significant. The increasing foreign investments will be beneficial to the Chinese bond markets such as more issuance of longer-dated bonds, thus helping China to establish its RMB bond yield curve, and improving the market efficiency. The Chinese authorities should launch more policy initiatives to attract foreign investors.

The Relationship Structure of Global Exchange Rate Based on Network Analysis

The optimal threshold strategy is put forward for establishing a suitable network for analyzing the correlation among the different exchange rates. The 33 currencies of the world’s major countries and regions are analyzed by the method of network analysis, and the multilateral exchange rate correlation network is established based on the optimal threshold. Combining with geographical features and the exchange rate regime, it is found that the international currency has obvious community structure, which is composed of three levels: the core currency area, the arbitrage currency area and the shadow currency area. The conclusion reveals the structural characteristics of the Jamaica international monetary system.

Analysis of the state and dynamics of the public debt of Ukraine

Introduction. It has been indicated that high level of debt burden in Ukraine in the conditions of insufficient budgetary funds and volatile economic and political situation exerts negative impact both upon the economy of the country and its every sector. This actualizes the research on the state and dynamics of the public debt within the context of achieving stabilization of economic processes, particularly Ukraine’s integration into global economic environment. The purpose of the paper is the analysis of the state and dynamics of the public debt of Ukraine in the context of solving the problems of its servicing. Results. It has been established that the major trend in Ukraine is a rapid increase in the total public debt which testifies to the instability and crisis events in the country’s economy. It has been defined that public and publicly guaranteed debt of Ukraine in Hryvnia equivalent is growing from year to year (increased by 106 times in 2018 as compared to 1996), while major periods of accelerated growth of public debt occurred during the periods of economic and financial crises (2008-2010 and 2014-2018). It has been determined that in 1999 and during 2014-2018 public and publicly guaranteed debt exceeded the critical limit of 60%, which asserts the presence of crisis events in the economy. It has been substantiated that there exists a close correlation between the public debt and change in currency exchange rate (correlation coefficient of 0,99 – very high bond strength on the Chaddock scale). It is revealed that the public debt-to-GDP ratio reaches maximum levels in the periods of economic crises and decreases in the periods of economic upturn. Conclusion. Hence, the issue of the debt-related security in Ukraine is topical and affects the economic situation. Prospects of further research in this area lie with solving the issues of managing public debt through changing the direction of the economic policy of the country as well as the scientific substantiation of managing public debt employing advanced economic instruments and progressive global practices.

The dynamic evolution of the characteristics of exchange rate risks in countries along "The Belt and Road" based on network analysis.

As of November 1, 2018, China's "One Belt and One Road" Initiative has involved 123 countries and promoted worldwide communication, cooperation and trade exchange. This paper constructs correlation networks of exchange rates among the countries along “The Belt and Road” and analyzes the risk contagion structure. It is found that when “The Belt and Road” initiative is initialized, countries in Eastern Europe occupy important positions in the network and play a vital role in the spreading of exchange rate risks; however, during the process of “The Belt and Road” initiative, the exchange rate risks are decentralized geographically, whereas they are centralized in countries that have in-depth communication and cooperation. The minimum Spanning Tree method is also proposed to investigate the structure of complex networks. It is found that the geographical link between exchange rate fluctuations and correlations among the countries has been strengthened while China has become an important node in the exchange rate network after the launch of “The Belt and Road” initiative. In addition, the influence and promotion of RMB has rapidly benefited from the initiative.

Origins of International Factor Structures

We show that exchange rate and international consumption comovements can be decomposed into components driven by trade network linkages, supply shocks, and demand shocks. Exchange rate correlations tend to be explained by trade network linkages, while consumption correlations tend to be explained by supply shock correlations. We explain this disconnect using an international network model where demand shocks are driven by market segmentation. We then show that the trade network generates common factors that align with the common factors in exchange rates. Our findings offer a trade-based account for the origins of comovements and factor structures in international asset prices and shed light on the nature of frictions in international financial markets.

Business cycle variations in exchange rate correlations: Revisiting global currency hedging

We revisit the main findings of Campbell et al. (2010) and Schmittmann (2010) covering an extended period from 1975 to 2016 and add a business cycle split. While we can confirm most of the results in the extended sample period, the role of the euro as a reserve currency vanishes during the financial crisis. The business cycle split shows there are differences in optimal hedge ratios between expansions and recessions for the euro and the other currencies investigated. These unstable correlations between asset returns and exchange rates should be considered carefully when aiming at volatility-minimizing hedge ratios of international investments.

International risk sharing in overlapping generations models

We propose a way to address the Backus–Smith puzzle that, instead of relying on extreme parameter values or complex modeling assumptions, simply switches the framework from infinitely lived agents to overlapping generations. Young agents face nondiversifiable wage risk that leads to a low degree of risk sharing within each country. Subsequently, international price movements are not sufficient to achieve the high consumption-real exchange rate correlation produced in standard infinitely lived agent DSGE models.

Correlation risk and international portfolio choice

Variance‐covariance risk of the exchange rate is highly relevant for international investors. This paper addresses optimal asset allocation with stochastic variances and covariances in a Wishart Affine Stochastic Correlation (WASC) model in incomplete and complete markets. We show that the (hedging) demand for exchange rate variance‐covariance risk can differ significantly between international investors. Local correlations with the exchange rate can affect the utilities of international investors differently while the impact of correlations between stocks can be symmetric. Depending on the current local exchange rate correlations domestic investors can benefit more or less than foreign investors from international trading.

The Impact of Falling Crude Oil Price on Financial Markets of Advanced East Asian Countries

We analysed the response of the financial markets of advanced East Asian countries to the significant decline in crude oil price which occurred in 2014. We used daily logarithmic returns of the representative exchange rates of national currencies and stock prices from 1 January, 2013 to 31 December, 2015. The empirical findings showed a significant change in both the dynamic correlation of exchange rates and stock prices and the causality relationship between the commodity, foreign exchange and stock markets during the period of declining crude oil price and instability. This paper highlights the response of the financial markets of advanced East Asian economies to a sharp decline in and instability of crude oil price, thereby contributing to the empirical literature and providing guidance for investment portfolio management.

Order flow and exchange rate comovement

This paper extends the literature on the linkage between order flows and exchange rates from the univariate to the multivariate framework. We examine how order flow differentials drive exchange rate comovements using data on five major exchange rates and at three different intraday frequencies. We also control for bid-ask spreads and the possible effects of order flow on returns and return volatility, and employ alternative order flow measures. Our results show that the effect of order flow on exchange rate comovements is significantly negative during the tranquil period but can become positive during the turbulet period. This negative effect lessens as the intraday frequency lowers. Generally over the entire sample period, exchange rate correlations are stronger during joint appreciations than joint depreciations.

The pattern of exchange rate co-movement in selected African countries

PurposeThe concept of co-movement has witnessed a resurgence in the international finance literature in recent years after the black swan events. This might be due to a renewed focus on globalization and financial market integration in the world over. The purpose of this paper is to examine the dynamic linkages in the foreign exchange market resulting from recent globalization and financial market integration in Africa.Design/methodology/approachA conceptual framework was adapted from the extant literature and was used as the basis of modeling foreign exchange market in Africa. This paper adopts a quantitative research approach and opted for dynamic panel data analysis to empirically unearth the determinants of foreign exchange market co-movement.FindingsIt is interesting to note that exchange rate co-movements were externally determined. Robust support was found for trade intensity, competition and world interest rate on foreign exchange rates co-movement, but regional interest rate differential decreased it. These findings clearly demonstrate the level of financial development and challenges that sometimes exist in exchange rate policy implementation by policy makers in Africa.Research limitations/implicationsFuture research might incorporate bilateral investment into the model of exchange rate correlation.Originality/valueStudies focussing on simultaneous consideration of intensity, trade competition and capital account openness to exchange rate correlations in the contexts of Africa are almost non-existent, and this study makes an important contribution in not only addressing this imbalance but also more importantly improving the relatively parsimonious literature on foreign exchange co-movement.

Do sovereign rating announcements affect emerging market exchange rate correlations? A multivariate DCC-GARCH approach

ABSTRACTThis article investigates the effects of sovereign credit rating announcements on time-varying exchange rate return correlations for a sample of 11 emerging market countries over the period 2002–2015. The data set covers daily exchange rates and long-term foreign currency sovereign ratings, outlooks and watch list. The pairwise time-varying correlations are derived by corrected Dynamic Conditional Correlation (cDCC) modelling which is a member of multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models family. Furthermore, to capture the global factor effect, a dynamic-weighted index is created by using dynamic principal component (DPC) analysis. Findings suggest that some of the emerging market exchange rate co-movements are affected by rating announcements. Upgrades of Moody’s and downgrades of Fitch lead to spillovers. Main source of these spillovers are sovereign credit rating changes of European countries, especially Czech Republic and Turkey. Countries with high amount of external debt, large current account deficit and speculative grade are more prone to be influenced by announcements on a foreign country’s long-term sovereign rating.